Portugal powers past weaker European equities

Tue May 6, 2014 12:54pm EDT

* Lisbon's PSI-20 equity index outperforms to rise XX pct

* Portuguese market buoyed by signs of economic recovery

* FTSEurofirst 300 falls 0.3 pct to 1,343.23 points

* Credit Suisse cuts Germany to "benchmark" vs "overweight"

* Backdrop of M&A activity cushions stock markets

By Sudip Kar-Gupta

LONDON, May 6 (Reuters) - European stock markets fell broadly on Tuesday, apart from Lisbon which swam against the tide in response to new signs of economic recovery which buoyed the country's bourse.

The pan-European FTSEurofirst 300 index, which had reached a near 6-year high of 1,357.05 points earlier this month, closed down by 0.3 percent at 1,343.23 points.

The euro zone's blue-chip Euro STOXX 50 index also fell 0.7 percent while Germany's DAX, which hit a record high of 9,794.05 points in late January, slipped 0.7 percent to 9,467.53 points.

Credit Suisse equity strategists on Tuesday cut their rating on Germany to "benchmark" from "overweight", highlighting the risk that German exporters could be hurt by a Chinese economic slowdown.

Hantec Markets analyst Richard Perry said Germany could underperform further as a result of clashes in Ukraine between pro-Moscow supporters and Kiev authorities, because German companies are among the most exposed in Europe to Russia and Ukraine.

But Portugal's PSI-20 equity index outperformed to rise by 0.5 percent. The PSI-20 index has risen around 15 percent since the start of 2014, beating a 2 percent gain on the FTSEurofirst 300.

Francois Savary, chief investment officer at Swiss bank Reyl, said his firm had decided to increase its exposure to Portuguese equities three months ago on signs that the country's economy was slowly recovering after its bailout from the euro zone debt crisis.

Following in the footsteps of Ireland, Portugal said it would end its international bailout this month without a back-up loan. Barely two years ago, Lisbon had been seen as at risk of defaulting on its debts.

On Tuesday, yields on the euro zone's lower-rated bonds hit record lows as investors welcomed Portugal's plans for a "clean" exit from its bailout and continued to expect some future easing of ECB monetary policy.

"The economic statistics are confirming that there is a recovery in place. It's a virtuous cycle that is in place," Savary said.

SUPPORT FROM MERGER ACTIVITY

European equities were cushioned from bigger losses by new signs of merger and acquisition (M&A) activity.

Paris-listed telecoms gear maker Alcatel Lucent rose 2.2 percent in brisk volume on renewed speculation that Finnish rival Nokia could buy Alcatel. Spokeswomen for Nokia and Alcatel declined to comment.

German auto parts and tyre maker Continental also outperformed with a 0.7 percent rise as its finance chief Wolfgang Schaefer said the company aims to grow by buying firms and would be able to shoulder another multi-billion euro acquisition in the next 18 months.

"We believe heightened M&A activity could act as a catalyst for a more general focus on value-style investing, while adding to the attractions of European equities in general," Barclays equity strategists wrote in a note.

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up (Additional reporting by Francesco Canepa and Blaise Robinson; Editing by Ruth Pitchford and Jane Merriman)